When thinking about financial wellness and how estate planning may provide peace of mind, you may be looking for assurances that your hard-earned assets will be cared for in a thoughtful manner. Common strategies for this generally include creating wills or naming beneficiaries of retirement assets. It is also important to consider when and how to create a trust. Because your life is unique, you may have situations that could require special attention. If you are not ready to relinquish control, but you still want the benefits of a trust, you can appoint yourself as trustee and name a successor trustee for when you are ready.
Setting up a trust can provide peace of mind knowing that the care you have provided the people and possessions you love will continue. Knowing which type of trust is best suited for your needs and how to begin can be daunting, which is why we wanted to share some foundational knowledge to help you in your financial wellness journey.
What is a trust?
A trust is a legal document that governs your wishes for how and when to transfer assets, including sentimental items, to beneficiaries or charities of your choosing.
When to create a trust?
Consider setting up a trust if you want to:
- Ensure that your assets are managed for the benefit of your heirs, according to your wishes
- Preserve your assets while potentially minimizing taxes and probate costs associated with transferring assets through a will
- Establish a tax-advantaged charitable gift
- Provide an orderly way of managing your finances if ill health stops you from doing so
Ways trusts can be beneficial
A trust may help you in these special circumstances.
- You have a loved one with a disability
You’ve devoted your time and energy to ensuring that your loved one with a disability has a good quality of life and receives the type of care they deserve. Help make sure they’ll continue to be cared for after you’re gone. You can set up a special needs trust to leave money or property without jeopardizing critical benefits. Make sure to appoint a trustee who will look out for this person’s best interests.
- You have children
If you have children, there are benefits of having a trust fund now and later. This helps make sure there is money for your children to be taken care of until they are grown, including any educational expenses you had planned to pay. It can also help your kids get their inheritance once they’re adults. Also make sure you’re up-to-date: If you created a trust before you had children or have other assets with their own beneficiary designations, like a retirement plan at work, update your beneficiaries to match your current wishes.
- Legacy planning
After all of the years that you have worked to build up a legacy, you want to make sure you efficiently transfer your assets to your beneficiaries. A trust can help you optimize the legacy you leave to the people and causes you care about.
- You have a loved one with an addiction or mental illness
If your loved one struggles with an addiction to drugs or alcohol, you may be wary of leaving him or her money in your will. There are other options for you to still provide care. Create a trust with rules and conditions for how your loved one would receive the money. You can specify that the money not go directly to the individual but rather be paid directly to a landlord, educational institution or medical providers.
- You own a business
You didn’t build your business overnight. How can you make sure it succeeds if something unexpected were to happen to you? You can also consider how to create a trust with a succession plan so your business can keep running without having to go through probate. This can be especially important if you’re not sure how other family members will react to change or if you have a business partner you don’t see eye to eye with anymore. Think ahead and discuss the matter openly with your potential successors to ensure that they are ready and willing to accept the role.
- You collect valuables
Your prized collection—art, coins, stamps—has taken years to build, taking you to amazing places along the way. Be sure you address it when you think about how to set up a trust. A trust can direct how to leave specific pieces to specific individuals, to a museum or to a nonprofit organization. Retain important documents such as bills of sale, certificates of authenticity and insurance appraisals.
- The difference between trusts and wills
You may also find tax benefits to trusts, depending on your situation. With a generation-skipping trust, for example, you may be able to give assets to grandchildren tax free. If you’re worried about privacy, it’s good to know that your heirs can typically settle a trust privately. In contrast, a will typically becomes part of the public record when it’s settled through a court process called probate.
Creating a trust may take longer than drafting a will, but when it comes to having the confidence that your wishes will be fulfilled and the people and causes you have interests in will be taken care of the way you want, having a trust may be worth the extra time.